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How can card issuers avoid usury limits?

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It’s the late 1970’s, a decade of high prices, steep inflation and a deeply worried credit card industry.


Interest rates were skyrocketing, the “plastic movement†was gaining momentum and the credit card industry faced a huge problem. Life had truly handed them lemons.


Among the interest rates to skyrocket was the inter-bank rate, the rate credit card issuers paid to borrow the money they needed to cover grace and installment gaps. At times that rate approached and exceeded 20%! The problem was Federal law prohibited the card issuers from charging higher interest rates than allowed by state law, specifically the state they were incorporated in…and those rates were capped at 10-15%. The card issuing banks saw their profits evaporate while the demand for credit was rising daily.


What to do? What to do? It didn’t take long for the card issuers to hit on a solution. They made lemonade. Lemonade that costs you $195.56 a cup!


A 1978 Supreme Court ruling in the case of Marquette National Bank of Minneapolis v. First Omaha Service Corp. removed interstate rate restrictions by permitting rates to be governed by laws in the lender’s home state, regardless of the laws in the borrower’s state. Lenders could effectively move to a state with higher usury ceilings and export those rates countrywide. But where, oh where to find such a state…


Credit card issuers hit on a plan to find a state with unmet employment needs and economic problems and offer them an opportunity. That opportunity came with a price tag in the form of revised usury laws, but for many economically strapped states, it was an offer they couldn’t refuse. First to bite was South Dakota, the prospect of hundreds of new jobs, increased tax revenues and the economic boost new industry would bring got the South Dakota legislature to move quickly, taking just days to amend the laws of South Dakota to allow unlimited interest rates on consumer debt. Goodbye hard times, hello Citibank!


Delaware was next to opt-in, revising its laws within the year. By the early 1980’s, Utah, was sporting a new American Express headquarters, Hew Hampshire became home to Providian, Virginia rolled out the red carpet for Capital One and Arizona found new residents, Bank of America’s card division, and Direct Merchant’s bank. Arizona, in a short fit of conscience, limited it’s rates to 36%, the other states had adopted “no ceiling†limits.


Within a very short time the creditors had turned a big problem into even bigger profits, profits which more than tripled again with the advent of “default rate†pricing. The consumers responded to the “repriced†cards by applying for them in record numbers. Last year saw $1.5 trillion in credit card charges at an average rate of 14%…


for the card issuers, lemons have never tasted better.

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